Text size

Dollar General gained in the pandemic as unemployment forced shoppers to seek less expensive options.

Justin Sullivan/Getty Images

Dollar General

was a big winner in 2020 as lower-income shoppers spent stimulus dollars and the company continued to expand its store base and omnichannel options. Yet many of those positive factors may now work against the discounter, warns RBC Capital Markets.

Analyst Scot Ciccarelli lowered his rating on Dollar General (ticker: DG) to Sector Perform from Outperform, although he tweaked his price target higher by $1 to $207. Dollar General stock was down 1.9{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} to $209.90 in early trading. The shares have gained 1.7{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} year to date and nearly 18{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} in the past 12 months.

Ciccarelli has three major concerns about the stock. First, while the company “continues to execute at a high level…macro headwinds (core inflation) may be building,” he said. So although Dollar General’s top- and bottom-line results may be able to outperform near term, he thinks the company may face a difficult operating environment.

He argued that higher prices for food and gasoline will limit the spending ability of lower- to middle-income consumers. “Given these dynamics, we think the broader economic environment is poised to become less favorable for Dollar General, especially as stimulus benefits start to fade,” Ciccarelli wrote.

Secondly, an improving labor market for job seekers could prove another stumbling block. Ciccarelli attributes much of Dollar General’s 2020 sales surge to the big spike in unemployment spurred by the pandemic, as consumers traded down to save money. Now, that trend appears to be reversing.

Finally, he said, while some retailers will reap longer-term benefits from government stimulus spending, given how quickly customer habits form, Dollar General might not be in that camp. Many of its shoppers are on tight budgets, so as stimulus checks are used up, the lift to its sales may be less durable than at some other companies.

Other analysts have also been getting more skeptical, especially after the company reported downbeat earnings in March, although some called the selloff a buying opportunity. The shares are up 13.5{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} since Barron’s recommended them last year.  

Write to editors@barrons.com

Exit mobile version